Archive for December, 2010

An employer who does not want to, or cannot, institute a qualified pension or profit-sharing plan, or who does not want to extend benefits to all of its full-time employees, can use a “Section 162 plan” to meet its executive compensation needs. A Section 162 plan leverages life insurance to provide supplemental compensation to select employees while also allowing the employer to take an income tax deduction for the premium payments.

In a Section 162 plan, an employer applies for, and pays premiums on, a life insurance policy on its employee’s life. The employee, however, owns the policy and has the right to appoint beneficiaries; the employer does not take an interest in the policy’s death benefit.

As an example of Section 162 plan and its tax advantages, … read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Why is this Topic Important to Wealth Managers? Provides analysis for those wealth managers who may be considering a Roth IRA conversion for their clients. Discusses potential benefits and detriments as well as comparative analysis.

There is a lot of talk of Roth IRA roll-overs this year as 1) the AGI limit on conversions has been lifted, and 2) for conversions in 2010, the tax owed is required as income not in 2010, but rather half in 2011 and half in 2012. And the tax rates will remain stable and low for both these years – signed into law as part of the Obama Tax Cut Compromise (See rates for 2011 and 2012 here).

On its face, many wealth managers have good reason to consider the conversion for their clients this year. But the question becomes, does it make sense, economically?

The crux of the problem lies in the early withdrawal penalties on the IRA, which is 10% if the account owner takes a distribution before age 59 1/2 or past allowable annual distribution limits before age 70 1/2.

Let’s take a look at two examples of situations where conversions may be considered this year (thus one day left….) To read this article excerpted above, please access www.AdvisorFX.com

Why is this Topic Important to Wealth Managers? We examine the IRS requirements set out in its Publication 587 for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.

Yesterday we opened the discussion by what authority of the Code a taxpayer may be allowed to deduct a business expense for use of part of his home in the pursuit of a trade or business. Today we turn to the following questions: What type of residence qualifies for this deduction? And the requirements for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.

What type of residence qualifies for this deduction? Many taxpayers narrowly consider that the “home office” deduction only applies for the traditional house with the white picket fence. But the Code’s section does not use the word “home”. Yesterday we noted that Congress chose the phrase “dwelling unit”. So what is a dwelling unit? The Section toward its end contains this definition: “The term ”dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property ….” Thus, taxpayers who are homeowners, condo-owners, renters of apartments, even a boat owner or renter, may potentially leverage this deduction.

What constitutes a “portion” of the dwelling unit? To read this article excerpted above, please access www.AdvisorFX.com

Why is this Topic Important to Wealth Managers? Americans are increasingly using their personal residence as their office. This trend has picked up much steam since the financial crisis began. Businesses cut costs during this period by not just allowing, but requiring, employees to telecommute. In fact, government, including the IRS, has also jumped on the bandwagon.

Yesterday we opened the discussion of when may a taxpayer be allowed to deduct a business expense from his gross income. That article noted that Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code. Treasury, being the Internal Revenue Service in this case, promulgated such regulations for Section 162 to guide taxpayers through its morass, and provide some example scenarios and the IRS’ application of the Code to those scenarios.

By example, Treasury’s Regulation for Section 162 states that: “Among the items included in business expenses are management expenses, commissions …, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business …, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.”

Why is this Topic Important to Wealth Managers? As the end of the calendar and personal tax year approaches, Advanced Market Intelligence will focus on end-of-the-tax-year issues that every wealth manager may relay as helpful information to his and her clients.

“How are business expenses reported for income tax purposes?” may initially seem like an easy question for many wealth managers. But normally, the easiness of answering this question is a result of referring to an information pamphlet by a service provider or perhaps a newspaper article. Unfortunately, these public sources of information are not always accurate. Also, because they are trying to present very complex information in understandable terms, these types of sources gloss over finer, yet very important elements, that if known, would impact a decision.

Seldom does the wealth manager take the initiative to undertake his own initial research of the actual rules and how the rules may be applied. Advanced Market Intelligence has been committed to empowering the wealth manager with the necessary information to efficiently find the important rules and provide examples of how the rules are applied to various example scenarios. Thus, let us first turn to the legislative rule applying to business expenses.

The Internal Revenue Code (the “Code”), legislated by Congress, establishes rules regarding ‘if and when’ a taxpayer may choose to deduct certain expenses from income. Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code. Business expenses are one type of such expense Congress has established for a taxpayer to reduce his gross income.

The Code section establishing the ability of a taxpayer to deduct a business expense is Section 162. The first part of the first paragraph of Section 162 reads:

(a) In general

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— …

Read the key information you need to know and relate to your client at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber):

The Social Security tax is divided by the employee and employer share. [1] For self-employed individuals, a separate but comparable tax applies to covered wages. [2]

For employees, generally, the term covered wages in this context means, all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash. [3]

Social Security is generally taxed at 6.20% and Medicare (Hospital Insurance) 1.45%. [4] Social Security taxes are composed of (1) the old age & survivors insurance (5.30%) and (2) disability insurance (0.90%) (together known as “OASDI”) tax equal to 6.2 percent of covered wages up to the taxable wage base ($106,800 in 2010 and again in 2011); and (2) the Medicare hospital insurance (“HI”) tax amount equal to 1.45 percent of covered wages. [5]

Why is this Topic Important to Wealth Managers? Discusses gifts and the general income tax implications gifts have to those who are the beneficiaries. Also discusses gifts as they relate to estate taxes.

As Christmas and Holiday time approaches, some clients who may be expecting large sums from Santa or other sources as gifts, may be interested to know the tax laws on gifts generally; today’s blogiticle present’s our “re-gifting” of an old idea, Section 102 of the Internal Revenue Code.

For those who haven’t had an opportunity to read the Code lately, (some estimate the Code and Regulations are close to 80,000 pages) there are still a few “friendly” sections that remain which serve as a reminder of a time gone by. Side Note: These authors have not yet evaluated the shortest Code section in terms of actual words, but if we were to, our guess is that Section 102 would be in the running at 212 words.

Section 102(a) reads: “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” It is worth noting, if we go back to Section 61, and the starting point for gross income, that Section 61(a) states: “Except as otherwise provided in this subtitle gross income means all income from whatever source derived…” The “[e]xcept as otherwise provided” is applicable here to amounts received as a gift, bequest, devise, or inheritance, which are specifically excluded from gross income. In other words, a taxpayer can give another taxpayer a gift of $1,000,000 and the latter will not recognize a penny of income for tax purposes, so long as it is really a gift, bequest, devise or inheritance. To read this article excerpted above, please access www.AdvisorFX.com

Why is this Topic Important to Wealth Managers? Discusses charitable contributions for individuals. May assist wealth managers plan client contributions made to charities this year.

Generally a deduction is allowed to “individuals, corporations and certain trusts for charitable contributions made to qualified organizations, subject to percentage limitations and substantiation requirements.”

Assuming all other factors equal, “it is usually better for the donor to make a charitable gift during life than at death, because the gift can generate an income tax charitable deduction for the donor.”

How much is the deduction?

The charitable contributionincome tax deduction for an individual taxpayer can be classified as not to exceed 50 percent or not to exceed 30 percent of the taxpayer’s adjusted gross income (AGI), depending on the donee charity.

This 10 week live video conference course on Brazil will be taught in English (but all attendants may use Portuguese to ask and respond to questions) by several renown Brazilian specialists who have extensive out-of-country experience, working as international counsel for large multinational companies, big 4 firms, and government, by concentrate on the Brazilian corporate structures, tax & financial systems, regulations and compliance, focusing on the practical aspects of doing business in Brazil. We will also discuss the impact of the recent changes in tax/corporate laws and regulations.

Why is this Topic Important to Wealth Managers? Yesterday we presented an overview of the Obama Tax Cut provisions that are relevant to wealth managers. Today we begin by taking a closer look at some of the details of those provisions and how they relate to wealth managers and their clients.

To understand the impact of this provision of the new bill, it will serve the reader to understand what the regular and minimum tax rates in relation to qualified dividend income as well as capital gains means. Read this complete article at AdvisorFYI

On Friday, President Obama signed into legislation, what is quickly becoming known as the Obama Tax Cuts, which extend tax breaks initially created by the George Bush Administration about a decade ago. For the previous discussions and various versions of this “long and winding road” of the passage of this new tax law – see Tax Deal Reached

For the insurance industry, the focus of the 2,000-page D-F Bill is Title V, which creates a Federal Insurance Office (FIO) within the U.S. Treasury. Under Title V, the Secretary of the Treasury is given rulemaking authority to implement and delegate the new duties of the FIO. The D-F Bill also establishes that surplus and reinsurance insurers will be subject to the regulation of their “domicile” instead of having to comply with multiple state requirements.

The FREE white paper we have prepared covers all of this—and more—in clear and concise detail. Please CLICK HERE to access and download your copy from AdvisorFX—absoluetely FREE

Can life insurance agents and their carriers be held responsible for adverse tax consequences resulting from their advice to customers about transactions involving the policies agents recommend and sell? A customer who relied on agents for tax advice concerning an annuity transaction believed the agents should be held to account for recommending a transaction that turned out to carry an unexpected tax bill. She sued the Insurance Company in federal district court, claiming its agents committed fraud against her by failing to inform her of the tax consequences of an annuity rollover.

The plaintiff owned two annuities—valued at about $80,000 and $12,000—that she received in a divorce settlement. She contacted the insurance company to find out her options for rolling the annuities over into one policy. Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We invite your questions and comments by posting them or by calling the Panel of Experts.

In a contentious move, the National Conference of Insurance Legislators (NCOIL) executive committee voted unanimously to adopt the Life Insurance Consumer Disclosure Model Act, (Model Act), which requires life insurance carriers to notify policy owners of settlement options when the policy owner is considering surrendering the policy or when the policy is set to lapse.

The life settlement industry is giddy over the Model Act—which should boost their business. But the insurance industry outlook on the Act is not so rosy—settlement essentially ensures that policies will not lapse before death benefits are paid and that many policy owners will choose settlement over carrier options like accelerated death benefits and policy surrender. Not all policy owners have a right to disclosure about settlements under the Model Act. The disclosure requirement applies only where the insured is sixty years old or older or “is known by the insurer to be terminally ill or chronically ill” and … read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Insurance companies have been getting a lot of press the last few years. But this time, it’s not a story about a health insurance carrier denying a father-of-five cancer patient’s potentially life-saving treatment. It’s a Los Angeles Times story pillorying life insurance company American General and several other carriers for rescinding life insurance policies after the insured’s death.

According to the Los Angeles Times article, $372 million in life insurance benefits were denied beneficiaries in 2009, doubling over the past decade even as life insurance policy sales have decreased.

The article breaks down the denied death benefits by insurance company, finding that some carriers deny death benefits more than others. The prime target …… read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Why is this Topic Important to Wealth Managers? Many US expats who do not work for a US headquartered company are failing to report pensions they are accruing from the companies they are working for overseas. These clients may incur large reporting penalties.

Submission by Thomas Carden, IRS Enrolled Agent

Many expats that do not work for a US based company are failing to report pensions they are accruing from the overseas companies they are working for. They often disregard the pension because they incorrectly assume that it is not taxable in the US.

However, the vast majority of foreign pension plans are not considered to be qualified by the IRS. Consequently, these foreign pension plans do not enjoy any tax mitigation – the plans are taxable.

The IRS has very rigorous regulations for plan reporting and for the criteria to be a qualified plan, and thus foreign employers rarely seek such plan qualification. Compounding the problem is that most financial professionals are rarely asking their clients with foreign employers “Do you have a foreign pension that contributions are being made to?”

Because of this mistaken belief that such foreign pension plans are to be treated like those in the US, many expats are incorrectly reporting their income net of any pension contributions.

Before FATCA (the Foreign Account Tax Compliance Act of 2010) the pension contributions were generally not being reported to the IRS, thus they were incorrectly escaping taxation on US returns. The goal of FATCA is to substantially capture information on the number of these accounts and many other foreign account types turning that information over to the IRS. The act puts onerous penalties on financial institutions that do not report accounts that are in the names of US citizens and other US taxable persons.

Any foreign institution that does not agree will be subject to a thirty percent withholding rate on payments made to it. Because of the penalties and the general move toward cross border reporting in financial transactions, the IRS will be receiving a large amount of information on these previously unreported accounts. The act also requires individuals to disclose any foreign accounts with a balance that exceeds $50,000. Failure to do so may result in an initial fine of $10,000 plus additional penalties.

The good news is that the acts reporting requirements are set to begin on January 2nd of 2012. Thus, expats have time to address the issue of unreported foreign pensions. The problem for expats with these unreported accounts is that the contributions are counted as taxable income in the US for the year they were made to the pension. If the IRS receives information about such an account, it is highly probable that it will send a “deficiency letter” stating that tax is due on the unreported amount. At worst, finding an unreported account may trigger an arduous audit.

The solution for the problem is for expats with any unreported pension accounts to amend the returns and restate the income received, for any years that contributions were made to the accounts. Such disclosures for past non-reporting should probably be handled by a expert in this area to avoid any unnecessary penalties.

Submission by Thomas Carden, a IRS Enrolled Agent and Expatriate Tax Specialist with 15 years of Tax and Financial Services Experience. He is currently enrolled in the Diamond Program at Thomas Jefferson School of Law while also studying to sit for the ATT tax designation in the UK. You may contact him via his email – tmcarden@yahoo.com.

For as long as life insurance has existed, con artists and murderers have sought payouts from policies on the lives of their victims. Tomisue Hilbert, wife of insurance giant Conseco, Inc.’s founder Stephen Hilbert, suspects that her mother, Suzy Tomlinson, was a victim of one such schemer.

She looks to hold AIG responsible for her mother’s untimely death, believing that a high-value policy issued by American General (an AIG subsidiary) on her mother’s life was the impetus behind a scheme that ended with her mother’s death. The life insurance policy at issue in the case is a $15 million policy on Tomlinson’s life naming Indiana businessman J.B. Carlson as its beneficiary. Policy premiums were paid with premium financing.

On September 29, 2008, Suzy Tomlinson drowned in her bathtub, fully clothed, after a night of drinking. Tomlinson’s death occurred right before a $1.27 million payment was due on the premium finance loan. Tomisue Hilbert’s lawsuit notes the fortuitous timing—for Carlson—of her mother’s death, Carlson’s debts of $5.9 million and the fact that Carlson may have been the last person to see her mother alive.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Record numbers of taxpayers will be subject to the 2010 alternative minimum tax (AMT) if Congress does not act by the end of the year. Congress has considered a number of possible AMT “patches” that would reduce the number of taxpayers subject to the AMT but has been unable to agree on the right approach. Although Congress passes an AMT patch annually, this year’s patch is coming later than usual.

In a November 9, 2010, letter to the IRS’s Douglas Shulman, House Ways and Means and Senate Finance committee members said that the IRS should expect Congress to pass 2010 alternative minimum tax relief by the end of this year. The joint letter was signed by Finance Committee Chair Max Baucus (D-Mont.), Finance Committee ranking minority member Chuck Grassley (R-Iowa), acting Ways and Means Committee Chair Sander M. Levin, (D-Mich.), and Ways and Means Committee ranking minority member Dave Camp (R-Mich.). Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Buzz about the Financial Industry Regulatory Authority, Inc. (FINRA) taking responsibility for regulation of investment advisers has been circulating for a couple of years now—but the talk is suddenly sounding less like gossip and a lot more like a plan. Last week, FINRA’s chief executive, Richard Ketchum, sent a letter to the SEC touting the benefits of appointing a self-regulatory organization (SRO) to oversee advisors. Although Ketchum’s letter does not directly ask the SEC to cede some of its regulatory authority over advisers to FINRA, hints abound.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed earlier this year, mandates an SEC study of its investment advisor examinations and whether delegation of advisor regulation to an SRO would improve examinations. Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Although IRS-approved retirement plans are intended to allow plan participants to sock away cash for retirement, some emergencies will permit a participant to withdraw plan funds prior to retirement—and there may be options to reduce or eliminate any tax due on the withdrawal.

Serving as a great reminder of the general principals of emergency distributions, the IRS recently ruled whether a qualified plan was permitted to make “unforeseeable emergency distributions” in three fact scenarios. In the first, the plan participant wanted to take an emergency distribution to repair water damage to his home. In the second situation, the participant requested an emergency distribution to pay his nondependent son’s funeral expenses. In the third situation, the participant requested an emergency distribution to pay “accumulated credit card debt.” Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

The Wall Street Reform Act1—signed into law by President Obama on July 21, 2010— grants the SEC the power to impose a fiduciary duty on broker-dealers. Although the SEC has not yet moved to apply the fiduciary standard—already applicable to registered investment advisors—to broker-dealers, both sides of the argument have made their voices heard, commissioning studies and sending volleys of comments to the SEC.

Holding broker-dealers to a higher standard would seem, at first glance, to be a positive for their customers. But a November 1, 2010, Securities Industry and Financial Markets Association (SIFMA) commissioned study calls into question whether applying a fiduciary standard of conduct to all brokerage activities would help investors. Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

In 2008, Cap Gemini reported that wealth management firms will sharply increase hiring because of the impending retirement, from 2010-2020, of “baby-boomer” wealth managers. Over the coming decade, wealth management firms will have substantially more client opportunities because the pool of high-net-worth individuals (HNWI) globally, and their assets, continue to grow steadily, and because half of HNWIs do not have a wealth manager.

Half of HNWIs Do Not Have a Wealth Manager

According to Oliver Wyman, only 50% of HNWI assets are professionally managed. An unprecedented amount of retiring boomers who had not previously used a wealth manager now require one to transition their asset portfolios to income ones, plan succession, and balance potential medical care needs. Wealth management firms therefore have a pool of approximately five million (and expanding) new client opportunities.

Increasing Wealth Manager Salaries and Bonuses

The San Diego Business Journal reported in 2009 that wealth management salaries held steady in the midst of the great recession, ranging from USD150,000 to USD400,000. Even more exciting, Cap Gemini reported that “bidding wars among firms for top advisors are not uncommon” and packages will include “bonuses equaling two or three times the payouts from just a few years ago”. Reuters reports that brokerage firms offer sometimes triple an adviser’s fees and commission over the previous year, whereas private bankers receive one to two times their previous year’s salary and bonus to move. (See Private banks battling for advisers to super-rich)

Significant Wealth Manager Hiring to Begin Working January 2011

Reuters reports that “Wells, he said, is looking outside the private banking world in its bid to add 150 new recruits. Citi has looked to Goldman Sachs Private Wealth Management as well as Barclays Wealth, a Barclays unit built from a business acquired from Lehman Brothers. Citi has said it aims to double its private banker ranks to about 260 within three years.”

According to a recent report by Javelin Strategy and Research (California); “[a]lthough the recent ‘Great Recession’ has caused millions of Americans to tighten their belts financially, nearly one out of five consumers are financial sleepwalkers”—those who do not manage their personal finances. [1] That’s right; at least 20% of Americans are not currently using wealth managers to manage their personal finances. The report states that the rate is more than double that of 2009. [2] This presents a vast opportunity for wealth managers to expand their market share.

The United States Department of Labor project that personal financial advisors are estimated to grow by 30 percent over the 2008–18 period. “Growing numbers of advisors will be needed to assist the millions of workers expected to retire in the next 10 years.” [3] Further, “[a]s more members of the large baby boom generation reach their peak years of retirement savings, personal investments are expected to increase and more people will seek the help of experts.” [4]

Moreover, there is a trend in corporate America to replace “traditional pension plans with retirement savings programs, so more individuals are managing their own retirements than in the past,” creating additional opportunity for wealth managers. [5] In addition, as medical technology continues to advance and people on average, live longer, the need for additional financial planning arises.

The average compensation for wealth managers is around $89,920 to $110,130 for those marketing insurance products and services as well as other financial investments. [6] New York has the most wealth managers in terms of total numbers. [7] In addition, New York wealth managers made on average $146,460, the most from any state. [8] Read the entire article at AdvisorFYI.

The Energy Improvement and Extension Act of 2008 created new laws requiring most regulated securities transactions occurring after December 31, 2010 to be subject to cost basis reporting by securities brokers to the IRS. [1] Currently, brokers are required to report the gross proceeds from the sale of a security on Form 1099. [2] The new law will add reporting of client’s adjusted basis of the security, and whether the gain is a short or long-term. [3] Mutual fund cost basis reporting is to start a year after regulated securities reporting, and options and debt contracts are to follow a year after mutual funds. The reports are to be filed on a Form 1099-B, Proceeds from Broker and Barter Exchange. [4]

Why is it important to know that the IRS will be receiving information about the values of securities of clients? Read the entire article at AdvisorFYI.